US services sector activity hits 3.5-year high in February
Synopsis
US services sector activity accelerated in February as the ISM non-manufacturing PMI rose to 56.1, the highest level since July 2022. Stronger new orders, rising inventories and expanding backlogs signalled improving demand. However, higher oil prices following Middle East tensions and supply constraints in logistics and technology sectors could pose risks to economic growth and inflation in the coming months.
US services sector activity accelerated to its strongest level in more than three and a half years in February, driven by rising new orders and inventory rebuilding, according to data from the Institute for Supply Management (ISM). However, escalating Middle East tensions and higher gasoline prices are emerging as downside risks to the growth outlook.
Key Highlights
- Fourteen services industries, including mining, wholesale trade, utilities, construction and educational services, reported growth.
- Retail trade, arts and entertainment, and transportation and warehousing contracted.
- Prices paid by businesses eased to 63.0 from 66.6 but remained elevated.
- Supplier deliveries index slipped to 53.9, indicating slower deliveries.
- Services employment rose to 51.8 from 50.3.
The Institute for Supply Management said its non-manufacturing purchasing managers index (PMI) rose to 56.1 in February, the highest reading since July 2022, from 53.8 in January. Economists polled by Reuters had expected a reading of 53.5.
A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of US economic activity.
Businesses rebuild inventories as the demand outlook improves
The survey showed inventories rebounding sharply to 56.4 from 45.1 in January, as businesses prepared for stronger demand in the coming months.
Participants reported building stock ahead of expected spring demand, following three consecutive quarters of inventory drawdowns.
New orders climbed to 58.6, the strongest level since September 2024, while export orders rebounded to levels last seen in July 2024.
Backlog orders also expanded for the first time in a year, suggesting firms are seeing stronger incoming demand.
Strong PMI supports first-quarter growth outlook
The strong services reading reinforced expectations that the US economy could post solid growth in the first quarter.
Economic growth slowed to an annualised 1.4% pace in the fourth quarter, after expanding 4.4% in the July-September period.
Oil price surge raises risks for consumers and inflation
However, the Middle East conflict poses potential risks to the outlook.
US gasoline prices have increased by at least 20 cents per gallon since the airstrikes on Iran last weekend, raising concerns that higher energy costs could affect consumer spending.
Goldman Sachs analysts estimated that a sustained $10 per barrel rise in oil prices could reduce fourth-quarter 2025 GDP growth by about 0.1 percentage point.
Quick FAQs
Q1. What drove the rise in the US services PMI in February?
Stronger new orders, rising inventories and expanding backlog orders contributed to the increase in the services PMI.
Q2. How did inventories change in the latest ISM survey?
Inventories rebounded sharply to 56.4 from 45.1, as businesses built stock ahead of expected demand.
Q3. What risks could slow the US services sector growth?
Higher oil prices, geopolitical tensions and supply constraints in logistics could weigh on business activity.
Q4. What does the PMI level above 50 indicate?
A reading above 50 signals expansion, while a level below 50 indicates contraction in the sector.
Q5. What does the PMI data mean for Federal Reserve policy?
Strong services activity and stable employment could support expectations that the Federal Reserve keeps interest rates unchanged in the near term.
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Pooja Malik is a business journalist with over six years of experience covering startups, entrepreneurship, and emerging trends. She has previously worked with leading media platforms such as YourStory Media and BW BusinessWorld, where she reported on business, policy, and market developments. Currently, she serves as Editor at The Inspirepreneur Magazine, where she writes and edits stories across business, lifestyle, and travel, with a focus on clarity, accuracy, and reader relevance.
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